Current Perspectives

U.S. Protectionism: Effects on Canada

Trump’s inaugural address and his actions during his first days in office reiterated his vision for more protectionist policies to help U.S. workers gain an advantage. Whether this is done through tariffs or renegotiating provisions surrounding existing trade deals like NAFTA, Trump has considerable leeway to act.

Canada is among the most exposed nations when it comes to the impact of U.S. protectionism, based on our reliance on U.S. imports to generate GDP (see chart on the right). Given the President’s plans to have targeted talks with Canada about NAFTA, we are inclined to increase our original assumption of a potential 1% hit to Canadian GDP from U.S. protectionism, spread over the next five to six years.

Rhetoric behind these talks suggests that it is more likely that the terms of NAFTA get adjusted rather than tariffs being imposed. Terms on the table for negotiation include foreign content rules and dispute resolution. Additionally, there will be a focus on restrictions for Canadian sectors that export the most to the U.S.: the automobile and energy sectors. Whether it is changes to NAFTA or the establishment of tariffs, Canada will suffer economic damage.

On the other hand, President Trump could choose to focus mainly on countries that run a significant trade surplus versus the United States and therefore can be seen as taking jobs from American workers. As the second chart illustrates, Canada could be largely exempt from these policies, while China, Germany, Mexico and Japan could be hit hard.

Another topic of focus for Trump is the revival of the Keystone XL pipeline project, which was originally blocked due to environmental concerns. Delivery of Keystone XL is advantageous for Canada. However, Trump has talked about foreign countries/companies needing to pay to access the U.S. market, which means the pipeline may not be entirely cost-free for Canada.

Over time, we assume a softer Canadian dollar in this environment, especially since Canada is unlikely to be as forceful as other countries at imposing countervailing tariffs in response to Trump’s protectionist policies. Although recent Canadian leading indicators have improved, risks from the Canadian housing market and U.S. protectionism leave us below consensus for Canadian growth in 2017.

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Eric Lascelles
Chief Economist
RBC Global Asset Management Inc.


The Second Rate Hike is Here, Now What?

For those who have been watching monetary policy closely over the last several years, the U.S. Federal Reserve’s (Fed’s) decision to hike the federal funds rate by 0.25% on December 14, 2016 might feel like déjà vu. In a move that was widely predicted, this hike brings the fed funds rate into a range of 0.50%-0.75%.

In this summary, RBC Global Asset Management’s Chief Economist Eric Lascelles, discusses the rate hike in more detail.

  • The surprising – though not shocking – part of the announcement was the Fed’s updated expectations around future rate hikes, which pointed to three anticipated rate hikes in 2017 versus the two hikes previously anticipated. This extra hike is hardly written in stone given the Fed's past track record of excessive optimism, but it is certainly plausible and it’s the reason markets have reacted to an announcement that was already universally expected.
  • The Fed’s statement did not mention fiscal stimulus. However, Yellen did acknowledge that it factored into members' forecasts. She also seemed to suggest that fiscal stimulus - a notable subject given an impending package from Trump - isn't particularly necessary now that the economy has strengthened.
  • The hike and hawkish tone constitutes yet another force pushing yields higher, and a continuation of the move we’ve seen since the U.S. election. We think there is a limit to how much further this trend can run. It’s undeniable that monetary policy, inflation expectations and debt expectations represent upward pressures for yields. Fortunately, the U.S. economy ends up slightly ahead as opposed to behind when weighing potential fiscal policy and stimulus against some of these drags.
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Eric Lascelles
Chief Economist
RBC Global Asset Management Inc.

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A Consequential Vote for Change

After a divisive and highly publicized election campaign, Donald Trump has been chosen to be the 45th President of the United States.

In this summary, RBC Global Asset Management’s Chief Economist Eric Lascelles, discusses what the outcome may mean for the U.S. economy, fiscal policy and financial markets.

  • The result: The U.S. made history last night by electing Donald Trump as the next President of the United States. In so doing, he becomes the first winner without a political or military background, and he represents a return of the Republicans to the White House after an eight year absence. In addition, Republicans maintained a majority in the Senate, giving them full control of Capitol Hill and the White House.  
  • Economic implications: The near-term economic implications of a Trump presidency appear to be positive on the surface as he has argued for legislation that would be fiscally stimulative. The longer-term implications are more negative, though the extent of the drag on the economy is largely dependent on overall immigration reforms and the clawback of trade deals. However, elections rarely change the script in a dramatic way. Much remains to be seen, including the extent to which Trump moderates his views to better align himself with Congress.
  • Market response: Despite the immediate sell off, markets regained some ground following Donald Trump’s victory speech, which gave some credence to the possibility that Trump may ultimately take a more moderate approach.  The U.S. dollar has weakened modestly relative to the euro, British pound and Japanese yen, though it has strengthened relative to currencies like the Mexican peso and Canadian dollar. Meanwhile, U.S. Treasury yields are modestly higher, and while credit spreads have widened, market action is calm and orderly.  
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Eric Lascelles
Chief Economist
RBC Global Asset Management Inc.

Krystyne Manzer, CFA
Portfolio Specialist
RBC Global Asset Management Inc.

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